AEROQUIP-VICKERS, INC. and Subsidiaries, f/k/a Trinova Corp. and Subsidiaries, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
No. 01-2741.
United States Court of Appeals, Sixth Circuit.
Decided and Filed Oct. 20, 2003.
347 F.3d 173
III. CONCLUSION
Accordingly, for the reasons set forth above, we AFFIRM the judgment of the district court.
Frederick E. Henry, III (briefed), Robert S. Walton (briefed), Thomas V.M. Linguanti (argued and briefed), Baker & McKenzie, Chicago, IL, for Petitioner-Appellee.
Frank P. Cihlar (argued and briefed), Joel L. McElvain (briefed), U.S. Department of Justice, Appellate Section, Tax Division, Washington, DC, for Respondent-Appellant.
Before: CLAY and GIBBONS, Circuit Judges; DUGGAN, District Judge.*
GIBBONS, Circuit Judge.
In 1986, petitioner-appellee Aeroquip-Vickers, Inc. (formerly known as Trinova Corporation, and operating as the Libbey-
In 1993, the Commissioner of Internal Revenue (CIR) asserted a deficiency against LOF for LOF‘s failure to include ITC recapture in income under former
I.
The facts are not disputed. Pursuant to Tax Court Rule 91(a), the parties submitted a Stipulation of Facts, which the Tax Court summarized as follows:
Petitioner, an accrual basis taxpayer changed its name to Trinova from the Libbey-Owens-Ford Company (LOF) on July 31, 1986. Petitioner timely filed a consolidated Federal income tax return with certain of its subsidiaries for the years at issue with the Internal Revenue Service Center, Cincinnati, Ohio, or the Internal Revenue Service office in Toledo, Ohio. Petitioner was engaged in the fluid power and plastics businesses and the manufacture of glass. The glass business was referred to as “LOF Glass Division.”
One of LOF‘s largest shareholders was Pilkington Brothers (Pilkington), an English company, which owned 29 percent of petitioner‘s common stock through its wholly owned U.S. subsidiary, Pilkington Holdings, Inc. (Pilkington Holdings). Two of petitioner‘s fourteen directors were associated with Pilkington. In late 1985, Pilkington approached LOF and began negotiations concerning the possibility of acquiring the glass business.
Earlier that year, on July 25, 1985, the board of directors of LOF approved the transfer of the glass business to a wholly owned subsidiary for valid business reasons. On February 19, 1986, LOF Glass, Inc. was incorporated as a wholly-owned subsidiary of LOF. On March 6, 1986, a “Transfer and Assumption Agreement,” amended on April 25, 1986, transferred to LOF Glass, Inc., all assets associated with the LOF Glass Division, including inventories and receivables, effective retroactively to February 19, 1986. These assets also included section 38 assets upon which LOF had previously claimed ITCs. Petitioner took no formal action contemplating the liquidation of LOF Glass, Inc., in the event that the acquisition by Pilkington did not take place.
The parties have stipulated that petitioner recognized no gain or loss upon the transaction whereby its glass business was transferred to LOF Glass, Inc., pursuant to the provisions of section 351 or sections 354, 355, and 368(a)(1)(D) (except as required by such sections or section 357(c)), and that pursuant to section 355 neither petitioner nor Pilkington Holdings recognized any gain or loss upon the exchange of LOF Glass, Inc., shares for the LOF shares.
Before February 19, 1986, income, deductions, and credits with respect to the LOF Glass Division were included in petitioner‘s return. From February 19, 1986, through April 28, 1986, deductions and credits with respect to LOF Glass, Inc. (the subsidiary), were included as part of petitioner‘s consolidated return. After April 28, 1986, LOF Glass, Inc., was no longer part of petitioner‘s affiliated group, or petitioner‘s consolidated Federal income tax return.
On its 1986 consolidated return, petitioner did not include any amount of ITC recapture with respect to the LOF Glass, Inc., section 38 assets. Respondent determined that a $5,718,749 ITC recapture arose from the April 1986 transaction. Petitioner does not dispute the amount of the ITC recapture....
On November 26, 1993, CIR issued a notice of deficiency to Trinova, stating that Trinova had understated its tax liabilities on the consolidated income tax returns that it had filed with its subsidiaries between 1985 and 1988. On February 18, 1994, Trinova filed a petition with the Tax Court contesting the deficiencies, including CIR‘s recapture of ITCs under
II.
The Tax Court‘s application of law to the fully stipulated record is reviewed de novo. See Friedman v. Comm‘r, 216 F.3d 537, 541 (6th Cir.2000).
Under former
Determining that Trinova was not liable for ITC recapture, the Tax Court emphasized that “the transactions herein took place in the consolidated return context.”
In support of its decision, the Tax Court relied upon CRR § 1.1502-3(f)(3), which provides the following examples:
Example (1). P, S, and T file a consolidated return for calendar year 1967. In such year S places in service section 38 property having an estimated useful life of more than 8 years. In 1968, P, S, and T file a consolidated return and in such year S sells such property to T. Such sale will not cause section 47(a)(1) to apply.
* * *
Example (3). Assume the same facts as in example (1), except that P, S, and T continue to file consolidated returns through 1971 and in such year T disposes of the property to individual A. Section 47(a)(1) will apply to the group ...
* * *
Example (5). Assume the same facts as in example (1), except that in 1969, P sells all the stock of T to a third party. Such sale will not cause section 47(a)(1) to apply.
The Tax Court first noted that “the mere transfer of section 38 assets within a consolidated group does not trigger recapture” and then added that Example 5 illustrated that “the transfer of the stock of [LOF Glass] to Pilkington Holdings would not trigger the recapture of such credit.” Trinova Corp. v. Commissioner, 108 T.C. 68, 73 (1997) (emphasis added).
CIR argues that the Tax Court erred by failing to give appropriate deference to Revenue Ruling 82-20, 1982 WL 199022. Revenue rulings are official interpretations by the IRS which have been published in the Internal Revenue Bulletin.
Id.
Rejecting CIR‘s position, the Tax Court concluded that “Example 5 and not Rev. Rul. 82-20 ... provides the key to decision herein.” Trinova Corp. v. Comm‘r, 108 T.C. 68, 77 (1997). The Tax Court acknowledged that both the Second Circuit in Salomon Inc. v. United States, 976 F.2d 837 (2d Cir.1992) and the Ninth Circuit in Walt Disney Inc. v. Comm‘r, 4 F.3d 735 (9th Cir.1993), cases involving “factual situation[s] substantially similar to that involved herein,” had reached the opposite conclusion. However, the Tax Court explained that
[w]ith all due respect, we disagree with both the result and the reasoning of the Courts of Appeals.... We think that the fact that the transfer of the assets and the transfer of the stock occurred in the same, rather than different, taxable years does not provide a meaningful basis for distinguishing Rev. Rul. 82-20 from Example 5 of the regulations.... We think the Courts of Appeals for the Second and Ninth Circuits accorded the ruling undue weight and that revenue rulings play a lesser role than the language of the opinions of those Courts of Appeals seems to indicate.
Trinova Corp., 108 T.C. at 76-77. The Tax Court also added that in this case CIR “has stipulated that there was a business purpose, i.e. substance, to the transfer by petitioner to [LOF Glass].” Id. at 78.
In Salomon, Engelhard Minerals and Chemicals Corporation (EMC) (later known as Salomon) developed a plan to separate its marketing arm and its industrial divisions into two independent companies. 976 F.2d at 838. EMC transferred the assets and liabilities of its industrial divisions to Porocel, an existing wholly owned subsidiary (later renamed Engelhard Corporation (EC)). Id. In return, EMC received EC stock. Id. Four days later, EMC “[spun] off” EC “by distributing all of its EC shares pro-rata to its stockholders.” Id. The IRS determined that EMC would not recognize gain as a result of the transaction. Id. at 839. However, the IRS also noted that “[c]ertain of the machinery, equipment and other assets that EMC planned to transfer to EC qualified as section 38 property,” and concluded that the “transfer of this property to EC followed by a spin-off to EMC shareholders [was] a ‘disposition’ which triggered § 47(a) recapture.” Id. at 840. Salomon brought suit to recover the recapture taxes paid. Id.
The Second Circuit concluded that Revenue Ruling 82-20 was not “unreasonable, nor inconsistent with prevailing law,” and thus was “entitled to great deference.” Id. at 841. The Second Circuit explained that since a direct transfer of Section 38 property was a disposition under
In substance, if not in form, the direct and the circuitous transaction are the same. Each achieves a rapid transfer of section 38 property outside the group. To distinguish between them would deny economic reality. Moreover, such a holding would allow the common parent
* * *
The rapidity with which these components follow one another suggest that they are, in substance, parts of one overall transaction intended to dispose of the section 38 assets outside of the consolidated group. Revenue Ruling 82-20 further solidifies this inference by positing that there is “no intention at the time of transfer to keep the property within the consolidated group.” These factual circumstances, timing and intent, differ from those presented in CRR Example 5. They lead to the conclusion that the two components are steps in a larger transaction which, when viewed as a whole, constitutes a § 47(a)(1) “disposition.”
Id. at 842 (citations omitted).
The reasoning and conclusion of the Second Circuit was subsequently adopted by the Ninth Circuit in Walt Disney. In that case, Retlaw, a predecessor of Walt Disney Inc. (Disney), developed a plan to separate its “Disney assets” (including the commercial rights to the name “Walt Disney” and two attractions at Disneyland) from its “non-Disney assets” (two television stations, a cattle ranch, and several agricultural properties), and then allow Walt Disney Productions (Productions) to acquire Retlaw (which would only retain its Disney assets). Walt Disney, 4 F.3d at 737. In order to accomplish this, Retlaw transferred its non-Disney assets, which included Section 38 property, to a newly-formed, wholly owned subsidiary called Flower Street. Id. In exchange, Retlaw received Flower Street common stock. Id. That same day, the Retlaw board of directors authorized the distribution of the Flower Street stock pro rata to the Retlaw shareholders, but specified that the distribution could only be made concurrently with the closing of Productions’ proposed acquisition of Retlaw. Id. The actual distribution occurred fifty-nine days later, immediately following the approval of the Retlaw acquisition by Productions’ shareholders and just prior to Productions’ acquisition of the stock of Retlaw. Id. at 738.
Retlaw and Flower Street then filed a consolidated federal income tax return. Id. In the consolidated return, however, Retlaw did not recapture the ITCs it previously had taken on Section 38 property included among the non-Disney assets transferred to Flower Street. Id. As a result, the IRS assessed a deficiency, which Disney contested. Id. Reversing the decision of the Tax Court, the Ninth Circuit applied Revenue Ruling 82-20 and determined that Disney was required to recapture the ITC it had previously taken with respect to Section 38 property transferred by Retlaw to Flower Street. Id. at 739. The Ninth Circuit explained that
Revenue Ruling 82-20 is not unreasonable because “[i]n substance, if not in form, the direct and the circuitous transaction are the same” and “to distinguish between them would deny economic reality” and would allow the common parent of a consolidated group to circumvent easily the recapture requirement. Moreover, Revenue Ruling 82-20 and Example 5 of the Consolidated Return Regulations are not inconsistent because they address different situations: the latter covers situations where, due to a “meaningful time delay” between the asset transfer and the spin-off, there is
“little reason to believe that the transferor corporation intends to use the transaction as a means of moving section 38 property out of the group while avoiding recapture taxes“; the former involves facts under which the transferor‘s initial intent to move section 38 property out of the consolidated group is undisputed.
Id. (quoting Salomon, 976 F.2d at 842) (internal citations omitted).
As the Tax Court observed, both the Second Circuit and the Ninth Circuit afforded “great deference” to Revenue Ruling 82-20. This court previously has held that “[a]lthough a revenue ruling ‘is not entitled to the deference accorded a statute or a Treasury Regulation,’ a revenue ruling is entitled to some deference unless ‘it conflicts with the statute it supposedly interprets or with that statute‘s legislative history or if it is otherwise unreasonable.‘” CenTra, Inc. v. United States, 953 F.2d 1051, 1056 (6th Cir.1992) (quoting Threlkeld v. Comm‘r, 848 F.2d 81, 84 (6th Cir.1988)); see also Johnson City Med. Ctr. v. United States, 999 F.2d 973, 977 (6th Cir.1993) (“[T]his Court accords deference to Revenue Ruling 85-74 under the standard set forth in Chevron [U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984)].”1); Wuebker v. Comm‘r, 205 F.3d 897, 903 (6th Cir.2000).
However, recent Supreme Court decisions limiting the Chevron doctrine have called our earlier cases into question. In Christensen v. Harris County, 529 U.S. 576, 587 (2000), the Supreme Court held that “[i]nterpretations such as those in opinion letters—like interpretations contained in policy statements, agency manuals, and enforcement guidelines, all of which lack the force of law—do not warrant Chevron-style deference.” The Court explained that such agency interpretations are entitled to respect, “but only to the extent that those interpretations have the ‘power to persuade.‘” Id. (quoting Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)). In United States v. Mead Corp., 533 U.S. 218, 226-27 (2001), the Supreme Court emphasized that Chevron deference is appropriate only “when it appears that Congress delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority” through “notice-and-comment rulemaking, or by some other indication of a comparable congressional intent.” The Court added that “an agency‘s interpretation may merit some deference whatever its form, given the ‘specialized experience and broader investigations and information’ available to the agency, and given the value of uniformity in its administrative and judicial understandings of what a national law requires.” Id. at 234 (quoting Skidmore, 323 U.S. at 139-40). In United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 220 (2001), the Supreme Court declined to consider “whether the Revenue Rulings themselves are entitled to deference.” However, the Court noted that the revenue rulings at
When promulgating revenue rulings, the IRS does not invoke its authority to make rules with the force of law. Specifically, the IRS does not claim for revenue rulings “the force and effect of Treasury Department regulations.” Rev. Proc. 89-14, 1989-1 C.B. 814, 1989 WL 519042. In light of the Supreme Court‘s decisions in Christensen and Mead, we conclude that Revenue Ruling 82-20 should not be accorded Chevron deference. Revenue rulings do, however, constitute “precedents to be used in the disposition of other cases.” Rev. Proc. 89-14, 1989-1 C.B. 815. Revenue rulings also serve as “official interpretation[s]” by the IRS of the tax laws. Treas. Reg. § 601.201(a)(6). By noting only that revenue rulings “are not entitled to the deference accorded a statute or a Treasury Regulation,” without explicitly acknowledging that some deference to revenue rulings is proper, the Tax Court mischaracterized the degree of deference accorded to revenue rulings. See, e.g., Omohundro v. United States, 300 F.3d 1065, 1069 (9th Cir.2002) (granting Skidmore deference to a revenue ruling); Del Commercial Props., Inc. v. Comm‘r, 251 F.3d 210, 214 (D.C.Cir.2001) (same); U.S. Freightways Corp. v. Comm‘r, 270 F.3d 1137, 1142 (7th Cir.2001) (same); American Express Co. v. United States, 262 F.3d 1376, 1383 (Fed.Cir.2001) (reasoning that “[i]n the context of tax cases, the IRS‘s reasonable interpretations of its own regulations and procedures are entitled to particular deference.” (citing Cleveland Indians, 532 U.S. at 220)).2 Consequently, the level of deference to be accorded to Revenue Ruling 82-20 depends upon “the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.” Mead, 533 U.S. at 228 (quoting Skidmore, 323 U.S. at 140). Consideration of all of these factors leads us to conclude that some deference to Revenue Rule 82-20 is proper.3
Aeroquip-Vickers argues that “neither the ITC regime nor the consolidated return regulations contain any ambiguity justifying Rev. Rul. 82-20.” Aeroquip-Vickers further contends that Revenue Ruling 82-20 is inconsistent with
Moreover, the approach favored by CIR and adopted by the Second and Ninth
Aeroquip-Vickers also argues that the “step transaction doctrine” is inapplicable in this case, since CIR has stipulated that valid business reasons existed for the intermediate steps taken by LOF. The step-transaction doctrine was not directly addressed in either Salomon or Disney. However, as Judge Swift of the Tax Court observed in his dissenting opinion, both of those decisions “rel[ied] heavily on ‘economic reality’ and the ‘substance-over-form’ doctrines, which are simply broader labels for, and which encompass, the step transaction doctrine.” Trinova Corp. v. Commissioner, 108 T.C. 68, 79 (1997) (Swift, J., dissenting). When analyzing the question of whether the separate steps of a complex transaction should be treated as having independent significance or as related steps in a unified transaction, “courts have enunciated a variety of doctrines, such as step transaction, business purpose, and substance over form. Although the various doctrines overlap and it is not always clear in a particular case which one is most appropriate, their common premise is that the substantive realities of a transaction determine its tax consequences.” King Ent. Inc. v. United States, 418 F.2d 511, 516 n. 6 (Ct. Cl. 1969); see also Comm‘r v. Court Holding Co., 324 U.S. 331, 334 (1945) (“The incidence of taxation depends upon the substance of a transaction.“); Brown v. United States, 782 F.2d 559, 563 (6th Cir.1986) (“The step transaction doctrine is a judicial device expressing the familiar principle that in applying the income tax laws, the substance rather than the form of the transaction is controlling.“) (quotation omitted).
This court has applied the “end result” test in order to determine whether the steps of a transaction should be treated separately or as a single unit. Brown, 782 F.2d at 563-564. “Under that test, purportedly separate transactions will be amalgamated into a single transaction when it appears that they were really component parts of a single transaction intended from the outset to be taken for the purpose of reaching the ultimate result.” Id. at 564 (quotations omitted) (emphasis added).
A recitation of the stipulated facts supports the conclusion that LOF entered the transaction with the intent to move Section 38 property out of the consolidated group. In late 1985 representatives of Pilkington approached LOF concerning the possibility of acquiring its glass business. Negotia-
Aeroquip-Vickers argues that, unlike in Disney and Salomon, in this case CIR “stipulated to the propriety not only of each step but also of the entire reorganization and split-off.” Aeroquip-Vickers contends that since “the whole transaction and each step along the way had economic substance,” no “tax avoidance motive” can be attributed to LOF.
Admittedly, this case does not involve a situation where “[t]he whole undertaking ... was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else.” Gregory v. Helvering, 293 U.S. 465, 470 (1935) (emphasis added). Aeroquip-Vickers correctly notes that CIR has stipulated that the requirements of
Here, although the individual steps of the transaction had a legitimate business reason, the transaction must be treated as a single unit and judged by its end result. “To ratify a step transaction that exalts form over substance merely because the taxpayer can either (1) articulate some business purpose allegedly motivating the indirect nature of the transaction or (2) point to an economic effect resulting from the series of steps, would frequently defeat the purpose of the substance over form principle.” True v. United States, 190 F.3d 1165, 1177 (10th Cir.1999). Aeroquip-Vickers has shown only the existence of a non-tax business purpose for engaging in a series of transactional steps “to accomplish a result [it] could have achieved by more direct means.” Id. (quoting Associated Wholesale Grocers, 927 F.2d at 1527). Notwithstanding this business purpose, CIR correctly concluded that the intended end result of the transaction was to allow LOF to avoid liability for ITC recapture.
III.
For the foregoing reasons, we reverse the decision of the Tax Court.
The majority overstates the level of deference revenue rulings receive. The Supreme Court‘s decision in United States v. Mead Corp., 533 U.S. 218 (2001), compels me to respectfully dissent. New circuit precedents, in Omohundro v. United States, 300 F.3d 1065 (9th Cir.2003) (per curiam), U.S. Freightways Corp. v. Commissioner, 270 F.3d 1137 (7th Cir.2001), and American Express Co. v. United States, 262 F.3d 1376 (Fed.Cir.2001), are cited by the majority to temper the impact of Mead. But as discussed below, these cases do not diminish Mead nearly to the extent that would be necessary to reach the result arrived at by the majority. I also wish to emphasize that assuming, arguendo, we wanted to defer to expertise, we would affirm the Tax Court.
This opinion is noteworthy because it involves a three-judge panel of the Court of Appeals reversing (by a two-to-one vote) a “fully reviewed” (effectively “en banc“) eleven-to-six decision by the United States Tax Court, which handles only complex tax disputes and consists of seventeen eminent jurists who specialize exclusively in tax law. An overwhelming majority of the Tax Court found Commissioner‘s Revenue Ruling unpersuasive, although two of three judges of this Court find the Revenue Ruling compelling—in part because Commissioner drafted the regulation. Commissioner is also a party to this dispute; in fact, the IRS seeks to collect millions of dollars. The Tax Court‘s experts have no stake in the outcome.
To simplify this controversy: two different kinds of tax guidelines conflict. On its face, a treasury regulation,
I.
In footnote three, the majority explains that “the amount of deference to be accorded to Rev. Rul. 82-20 ultimately turns upon the validity of its reasoning.” I completely agree. Mysteriously, however, the majority also states that the Tax Court erred “[b]y noting only that revenue rulings ‘are not entitled to the deference accorded a statute or a Treasury regulation,’ without explicitly acknowledging that some deference to revenue rulings is proper.” To the extent the majority implies that a revenue ruling could ever receive more deference than its persuasive value warrants, the majority is incorrect.
As the majority properly notes, the Supreme Court‘s decision in United States v. Mead Corp., 533 U.S. 218 (2001), restricted the scope of Chevron deference.1 Mead involved a tariff ruling by the Customs Service that classified Mead‘s “day planners” as diaries for assessment purposes under the Harmonized Tariff Schedule of the United States,
Mead explained that “a very good indicator of delegation meriting Chevron treatment is express congressional authorizations to engage in the process of rulemaking or adjudication that produces regulations or rulings for which deference is claimed.” 533 U.S. at 229. According to Mead, when Congress wants an agency to act with legal force, it wants the agency to guarantee “fairness and deliberation,” which the use of a “relatively formal administrative procedure tends to foster.” Id. at 230. Mead also states that notice-and-comment procedures are not the only indicator that Congress intended an agency to act with the force of law, because “other statutory circumstances” may sometimes signal the same legislative objective. Id. 229. The Court, however, cited only one case, NationsBank v. Variable Annuity Life Insurance Co., 513 U.S. 251 (1995), in which an agency ruling received Chevron deference without notice-and-comment procedures.2
The majority agrees that Chevron does not apply to revenue rulings because such rulings are issued without the force of law.3 See also Omohundro v. United States,
In Skidmore v. Swift & Co., 323 U.S. 134 (1944), the Court gave an agency pronouncement only the weight it deserved in light of “the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade.” Id. at 140.
When the majority claims the Tax Court erred by failing to acknowledge that “some deference to revenue rulings is proper” (emphasis added), the majority overstates Skidmore “deference.” Skidmore “deference” does not always involve “deferring” because the level of respect afforded the agency pronouncement depends on its “power to persuade.” Skidmore, 323 U.S. at 140. An agency pronouncement with no persuasive power receives no deference. Therefore, because the Tax Court majority found the Treasury Department‘s justification for its revenue ruling unpersuasive, the Tax Court did not err by failing to acknowledge that “some deference to revenue rulings is proper.” Likewise, to the extent this Court finds the Treasury Department‘s rationale unpersuasive, we have no obligation to defer. Exactly as the majority explains, “the amount of deference to be accorded to Revenue Ruling 82-20 ultimately turns upon the validity of its reasoning.”
The majority cites a string of four cases in support of its statement that even after Mead “some deference to revenue rulings is proper.” Yet none of these cases push Skidmore “deference” to the level that the majority would have in the present case. The first case cited, Omohundro, grants Skidmore “deference.” But as explained, Skidmore “deference” relies on the “power to persuade.” Omohundro granted “deference” only after ruling, “First, the IRS‘s reasoning is valid.” Id. at 1068. The “deference” accorded was to persuasive reasoning, not merely to IRS interpretive authority. The majority in the present dispute accords deference based upon the Revenue Ruling itself, apart from its persuasive power.
The second case cited, Del Commercial Props., Inc. v. Comm‘r, 251 F.3d 210 (D.C.Cir.2001), was released ten days be-
The third case cited by the majority, U.S. Freightways Corp. v. Comm‘r, 270 F.3d 1137 (7th Cir.2001), states:
Although we acknowledge that even after United States v. Mead Corp., 533 U.S. 218, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001), we owe some deference to the Commissioner‘s interpretation of his own regulations, we conclude here that the lack of any sound basis behind the Commissioner‘s interpretation, coupled with a lack of consistency on the Commissioner‘s own part, compels us to rule in favor of Freightways.
Id. at 1139. This statement highlights again the importance of Mead. While U.S. Freightways professes to accord some “deference,” it is not at all clear that the term is being used to signify anything substantially beyond than the “power to persuade,” under Skidmore. After all, as stated in the quoted passage above, U.S. Freightways rejected the Commissioner‘s ruling, which severely calls into question the amount of true deference that was actually given by the Seventh Circuit.
The last case cited by the majority is Am. Express Co. v. United States, 262 F.3d 1376. This case, unlike U.S. Freightways, held in favor of the Commissioner. However, American Express is readily distinguishable from the present case. In American Express, the court ruled that the interpretation was not at all in conflict with the applicable regulation, since on its face the regulation simply did not address the issue at hand. Id. at 1381 (“There is nothing on the face of
While the language contained in Omohundro, U.S. Freightways, and American Express does indicate that even after Mead some “deference” is due to revenue rulings, it is not at all clear that this deference is anything more than Skidmore “deference,” which simply mandates that the reviewing court must consider agency interpretations, examining them for their “power to persuade.”
The following sections explain why the government‘s reasoning is invalid.
II.
Unlike the majority, I see no reason to rely on two equally antiquated decisions from other circuits that deal with ostensibly similar tax controversies.4 Both Walt Disney, Inc. v. Comm‘r, 4 F.3d 735 (9th Cir.1993), and Salomon, Inc. v. United States, 976 F.2d 837 (2d Cir.1992), accepted Petitioner‘s interpretation in Rev. Rul. 82-20. These cases are distinguishable and outdated.
In both Disney and Salomon, the taxpayers sought rulings from the IRS as to
Even without this distinction, neither Disney nor Salomon should influence this Court. Both Disney and Salomon explicitly stated that IRS revenue rulings deserve “great deference.” Walt Disney, 4 F.3d at 740-41; Salomon, 976 F.2d at 841. We cannot know what conclusion the Salomon or Disney courts would have reached had they not afforded the Commissioner “great deference” revenue rulings unquestionably no longer receive. See Omohundro v. United States, 300 F.3d at 1068; U.S. Freightways Corp., 270 F.3d at 1141; Am. Express Co. v. United States, 262 F.3d at 1382-83. This tremendous difference makes Disney and Salomon inapplicable in contemporary tax litigation.
III.
The next step is to consider whether the Commissioner has offered a persuasive position.
A.
The consolidated return provisions in the tax code allow multiple corporations (including a parent and subsidiaries) to file a single consolidated tax return.
To file a consolidated return, each subsidiary must be linked, directly or indirectly, to the common parent by an ownership chain of both 80% of the voting power of the subsidiary and 80% of the value of the subsidiary‘s stock.
B.
Congress delegated authority to the Treasury Department to promulgate regulations governing the distribution of tax credits among the members of a consolidated group. Accordingly, the Secretary of the Treasury instituted
a transfer of Section 38 property from one member of the group to another member of such group during a consolidated return year shall not be treated as a disposition or cessation within the meaning of section 47(a)(1). If such Section 38 property is disposed of, or otherwise ceases to be Section 38 property or becomes public utility property with respect to the transferee, before the close of the estimated useful life which was taken into account in computing qualified investment, then section 47(a)(1) or (2) shall apply to the transferee with respect to such property (determined by taking into account the period of use, qualified investment, other dispositions, etc., of the transferor). Any increase in tax due to the application of section 47(a)(1) or (2) shall be added to the tax liability of such transferee (or the tax liability of a group, if the transferee joins in the filing of a consolidated return).
(emphasis added). Thus, the regulation tests the transferee to determine whether it must recapture ITCs and whether the transferee may report the recapture on its separate return (if it has left the consolidated group) or the consolidated group return (if the transferee remains a member of the group).6 No other consolidated return regulation addresses ITC recapture and no other regulation explicitly requires ITC recapture when a transferee of Section 38 property is split-off from the affiliated group in a valid “D” reorganization. The majority offers no response to this argument.
C.
Once
Example (1). P, S, and T file a consolidated return for calendar year 1967. In such year S places in service Section 38
property having an estimated useful life of more than 8 years. In 1968, P, S, and T file a consolidated return and in such year S sells such property to T. Such sale will not cause section 47(a)(1) to apply. Example (2). Assume the same facts as in example (1), except that P, S, and T filed separate returns for 1967. The sale from S to T will not cause section 47(a)(1) to apply.
Example (3). Assume the same facts as in example (1), except that P, S, and T continue to file consolidated returns through 1971 and in such year T disposes of the property to individual A. Section 47(a)(1) will apply to the group and any increase in tax shall be added to the tax liability of the group. For the purposes of determining the actual period of use by T, such period shall include S‘s period of use.
Example (4). Assume the same facts as in example (3), except that T files a separate return in 1971. Again, the actual periods of use by S and T will be combined in applying section 47. If the disposition results in an increase in tax under section 47(a)(1), such additional tax shall be added to the separate tax liability of T.
Example (5). Assume the same facts as in example (1), except that in 1969, P sells all the stock of T to a third party. Such sale will not cause section 47(a)(1) to apply.
When closely scrutinized, these examples vindicate Taxpayer‘s position.
In example one, P, S, and T are members of a consolidated group at all times. There is no
In example two, S acquires the property from P before the corporations become members of a consolidated group. S then transfers the property to T after the corporations form a consolidated group. P still did not engage in a
In example three, the corporations acquire and transfer the Section 38 property while belonging to a consolidated group, but T then transfers the Section 38 property to some unrelated party. This triggers a
In example four, when T transfers the Section 38 property to an unrelated third party, P, S, and T are no longer members of a consolidated group. Thus, T files a separate return. T‘s transfer outside the group triggers the ITC recapture and that “additional tax shall be added to the separate tax liability of T.”
In example five (like example one), the Section 38 property was acquired by S and transferred to T while all parties remained members of a consolidated group. When
Example five reflects precisely what happened in this case. A parent (LOF) transferred Section 38 assets to a subsidiary (LOF Glass) that was a member of the parent‘s consolidated group. The parent then transferred its stock in the subsidiary to a third party outside the consolidated group (Pilkington).9 According to example five, any liability for recapture lies with the transferee, not with the original parent/transferor.
D.
In Rev. Rul. 82-20, 1982-1 C.B. 6, the IRS considered the application of the ITC recapture provisions of the IRC and the consolidated return regulations. Specifically, the IRS applied
The ruling initially noted that under
The rationale, according to the Commissioner, is that a parent corporation‘s transfer of Section 38 property to its wholly-owned subsidiary is not treated as a disposition so long as the parent corporation substantially owns the subsidiary.
E.
Rev. Rul. 82-20 is inconsistent with
First, if intent were the decisive factor under the regulation, the regulation would make that clear. Commissioner argues that the regulation does make that clear, because in crucial example five, the parent, subsidiary, and transferee file consolidated returns in 1967 and 1968, and the subsidiary transfers its Section 38 property in 1968, but the parent does not sell the transferee‘s stock until 1969.
This extraordinarily strained hypothesis is hard to accept primarily because the relevant regulations never mention intent. One cannot reasonably believe that the Treasury Department meant an intent test but, rather than saying so expressly, it said so through the circuitous route Commissioner defends. A parent company could certainly wait a year before transferring assets outside the consolidated group, yet have intended to make the transfer from the outset. Most likely, example five has the relevant events occurring in different years simply to make the hypothetical as simple and clear as possible with respect to the order in which the transactions take place. That certainly seems a more plausible explanation than to assume the reference to a different year somehow implies an intent standard. It also seems reasonable that the Treasury Department merely wanted example five to illustrate the clear language in
Second, the interpretation in Rev. Rul. 82-20 fails to respect the single-taxpayer theory that underlies the consolidated return regulations. As already noted, according to
Due to the single-taxpayer theory embodied in the consolidated return regulations and the resulting transferee liability imposed on LOF Glass for the ITC recapture, LOF‘s transfer of the Section 38 property to LOF Glass did not trigger
In April of 1986, LOF Glass split-off from the LOF affiliated group in the “D” reorganization with the exchange of LOF Glass shares for Pilkington‘s interest in LOF. This occurred immediately after LOF made LOF Glass an independent subsidiary, but the parties stipulated that LOF Glass continued to use the Section 38 property in the glass business both before and after LOF Glass left the consolidated group. When LOF Glass left the group, it did so subject to the transferee obligation for the ITC recapture that arose when it received the Section 38 property along with the LOF Glass Division business initially. See
Although Commissioner argues, in accordance with Rev. Rul. 82-20, that these intra-group transfers and the “D” reorganization evince an intent to avoid ITC recapture by disposing of the property outside of the group, the worst the transactions show is nothing more than a shift in ITC recapture liability.13 By transferring the LOF Glass Division and the Section 38 property within the consolidated group, the parties imposed liability for the ITC recapture on LOF Glass. When Pilkington acquired LOF Glass—albeit one day later—LOF Glass brought with it the same ITC recapture obligation. If LOF Glass became a member of a Pilkington consolidated group, then that consolidated group would be subject to ITC recapture as well. See
IV.
Commissioner also argues that the interpretation of
The appeal of step-transaction analysis rapidly dissipates when one remembers that Commissioner stipulated that the transaction appropriately received “D” reorganization treatment, which means Commissioner stipulated, inter alia, that the split-off transaction was “not used principally as a device for the distribution of the earnings and profits” of LOF or LOF Glass. See
The majority cites no authority for the proposition that the IRS can accept an entire transaction as justified by a legitimate business purpose to determine whether “D” reorganization treatment will apply, but not accept a part of that same transaction as motivated by a legitimate business purpose exclusively to determine ITC recapture—particularly given that the “substance over form” principle requires courts to view transactions “as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant.”14 Court Holding, 324 U.S. at 334.
The majority further concedes, as it must, that this case does not involve a situation where “[t]he whole undertaking ... was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else.” Gregory v. Helvering, 293 U.S. at 470. By emphasizing “and nothing else,” the majority implies that, despite the government‘s stipulation, both a legitimate business purpose and an improper tax avoidance objective motivated the disputed transaction. The majority then cites a Tenth Circuit case, Associated Wholesale Grocers, Inc. v. United States, 927 F.2d 1517, 1526 (10th Cir.1991), for the general proposition that a taxpayer may not dodge provisions of the tax code merely because the taxpayer can articulate some business purpose for its activity. In the present dispute, however, Taxpayer offers this Court much more than a general assurance that it had a business purpose for its transaction.15
Again, the Commissioner stipulated that the transaction properly received “D” reorganization treatment, which means Commissioner stipulated, inter alia, that the split-off transaction was “not used principally as a device for the distribution of the earnings and profits” of LOF or LOF Glass. See
Moreover, in Rev. Rul. 79-250, 1979-2 C.B. 156, the Commissioner conceded that in
V.
More than two decades ago, this Court correctly observed that the Treasury Department‘s consolidated return regulations should receive greater deference than interpretations of those regulations. See Wolter Constr. v. Comm‘r, 634 F.2d 1029, 1034-35 (6th Cir.1980). This principle unquestionably applies here. It seems either very difficult or impossible for an interpretive statement to survive Skidmore review when that statement conflicts with the text it purports to interpret. Commissioner‘s Revenue Ruling is not persuasive because it contradicts the text and examples in
For all the aforementioned reasons, I respectfully dissent.